Gary Vaynerchuk used to pay 5 cents a click for Adwords.
That was 1998...but those days are long gone.
Now the costs of Google ads, affiliate sales, Facebook ads & more are on fire.
In this article, I’ll share with you if your customers are really worthy what you're paying for them....
And how to combat high costs of customer acquisition to create a solid profitability in your business.
Yes, it calls for a disruption.
Tell me if this rings a bell:
“You're a few clicks away from your first ad account...”
Acquisition channels like Google, Facebook, Youtube wanted more customers.
And hence they made advertising zippy and easy.
Over a period of time, several businesses jumped on the bandwagon and today over 6 million businesses advertise online.
Small business owners have to pay through our nose to win attention of their prospects.
The following snapshot shows how much an online flower shop must pay to Google to bring one new visitor:
The right column shows the CPC or the cost per click in USD.
It ranges goes from $3.37 to $7.87 and beyond, depending on the search volume.
Let's look at the formula to calculate your customer acquisition costs:
Average Order Value (AOV) = Total Revenue/Number of Orders
So let's assume in a given month you made $15,6250 and sold 1250 product.
Your AOV was $125.
Now let's calculate how much you can spend to acquire a customer:
CAC = AOV - Cost of Goods Sold - Overheads - Profit
Cost of goods sold = Say 20% of AOV = $25
Overheads = Say 30% of AOV = $37.5
And Profit = Say 20% of AOV = $25
So your CAC = $125 - $25 - $37.5 - $25 = $37.5
This means you can spend $37.5 to acquire a customer at 20% profitability.
And if your conversion rate is 10%, you need 10 clicks to acquire 1 customer.
For 10 clicks - You can pay $37.5 from your pocket.
For 1 click - You can pay $3.75.
And if your AOV is $100 then you can only pay $1.25/click!
That's your tolerable cost per click.
But instead, thank to the fierce competition, you have to pay $3 upwards. That right there is the problem.
Steve Olensky, from Forbes magazine rightfully identified the rising costs of customer acquisition as marketing’s next biggest hurdle.
This frenzy plays out (literally) billions of times each day, with marketers jostling for position to win consumers attention and engagement. The competition raises the cost of acquiring a customer beyond reason - and the resulting economic outcomes reflect this.
- Steve Olenski, Marketing's Next Big Hurdle: The Rising Cost Of Customer Acquisition on Forbes.
And as if this was not enough, the advertising platforms keep changing their algorithms.
Here's a concerned advertiser complaining about high ad spends:
The Facebook Help Team Rep confirms that the advertisers on Facebook are growing exponentially and so is the cost of reaching the same people.
He's advised to:
But will this really help?
Let’s find out.
Spend a dollar on ads and make two in return.
But how many posts have you come across where people have expressed disappointment over scaling their ads?
Personally, I had spent $5 on a specific Facebook ad and got an immediate sale of $40.
So basically I made $35 by running that ad.
What an investment and a great ROI!
The obvious next step was:
Turn on the knob and pour more money on the winning ad.
But the second sale didn’t happen until good $80 was spent.
I instantly lost what I gained like in a gamble.
It’s actually like spending your hard-earned money to fund the Facebook economy.
Contrary to what advertisers want you to believe, the harsh reality of online advertising is that it’s not a linear graph.
X (Your Budget) is NOT directly proportional to Y (the sales).
Also, think about this...
Google adwords started at 5 cents a click and has now risen to a global average of $1.78/click.
This means when the competition jumps in and raises their budget, the battleground becomes fierce.
Just like it’s the case with television advertising, where no small business can advertise today.
Increasing ad budgets can only take you so far...till the competition catches up and botches the game.
So there are unknown variables in this seemingly simple equation i.e.:
Competitors’ ad spends, your ads' CTR, relevance score, recent changes in Facebook algorithms and the time of the year (during certain months, ad spends are generally higher).
So what can you do?
Target better? As Facebook suggests...
Facebook gives you three ways to target your audience:
#1: Target new audience based on their demographics/interest
#2: Target lookalike audience
#3: Target pixelled users – the pool of Facebook users who visited your web pages in the past 6 months
Out of these three options, #3 is the least expensive one.
The average cost of bringing back a visitor through re-targeting is about 50 cents/click.
But targeting cold audience – based on interest/demographics or lookalike audience is quite expensive.
Take a look at this Redditor complaining about how even an ad with a good engagement, high relevance score and a low bounce rate of the website has a high cost per click (CPC):
The devil’s in scale. A relevant targeting cannot guarantee that you'll be a paying a low cost per click.
So how about raising your product prices? That can sure cover up for higher ad costs.
Let’s find out...
Raising product prices sounds like a lucrative option.
The internet is flooded with articles that say, price rise is the way to go about it.
“Command your worth!” – They insist.
“Raising prices will improve your bottom line.” – They babble.
But no one tells you that you may turn off prospects and lose business overnight.
A sudden jump in prices can shock prospects who’ve been keeping an eye on your products and lead to a backlash.
Here’s a snapshot of the backlash Chargify, a SAAS startup had to face when they raised prices overnight:
Their customers started switching to and promoting competition.
So be cautious before you even touch that red-hot knob.
Your products’ prices depend on several factors such as demand, competition, buyers’ perception and more.
If you bump up the prices without due diligence, you may experience an unexpected dip in sales.
For example: Here are some reasons a restaurant may increase its prices:
If any of this holds true for your business, consider raising prices otherwise it can destroy your sales momentum overnight.
Do it...only if you’re confident about the percentage increase, timing and communication strategy of your new prices.
The answer’s simple:
Increase the amount your customer spends with your business. Increase your AOV and you'll start becoming profitable on your ads!
They say: Whoever spends the most wins.
The truth is this: Whoever squeezes the most from their customers can actually spend the most.
Let me prove it to you...
Let’s say we both own an online flower shop. And we sell a bouquet of premium flowers for $30.
We both spent $200 to acquire 5 new customers each who on an average paid us $50 each.
So we made $250 in sales with an advertising spend of $200.
But I didn’t stop at that.
I know they’re considering flowers as a gift for someone special. And they’d sure like to impress them!
They can stretch their budget by a bit just to cast a good impression. 😉
So I offered my shoppers a chance to upgrade to a better vase at $20 extra.
And about 5 of them agreed to upgrade. I made $100 extra with that one offer.
And then I made a one-time special offer ‘Get a pack of strawberry-chocolates at a one-time offer price of $30'
3 customers agreed.
So I made a total of $440 with an advertising spend of $200 whereas you settled at $250.
Note: I didn't spend a penny more acquisition in this case. So when I subtract the cost of goods sold and overheads, I am left with pure profits!
That and only that is the way to shield your business against rising costs of acquisition.
Clearly making your customers spend more is the way to go about it. It complements a good ad budget and a relevant targeting.
And is a more fool-proof strategy than raising prices...
But I get it.
The internet is flooded with upselling techniques.
There are a ton of techniques everyone and their mom is blogging about.
You don’t want to go from one technique to the next, scouting hundreds of blog posts in the process.
I know that grind first-hand. So we’ll cut the fluff and in my next article:
I'll cover top 5 upselling techniques your competitors are using & 1 undercover technique they’re not.